Otis Bowen set stage for Indiana's property tax caps

May 14, 2013

Written by

Andrea Neal

Otis Bowen will go down in history as the governor who delivered landmark property tax relief to Hoosiers. He also deserves mention for what happened on Gov. Mitch Daniels’ watch: a tax reform amendment to the state Constitution.

Relief is “lightening of something oppressive,” according to Merriam-Webster. Reform is “correction of an abuse or wrong.” The first tends to be temporary, the latter more permanent.

That’s why Bowen lobbied for the Daniels tax plan in 2008 in response to another property taxpayer rebellion. It was necessary, Bowen said, to finish the work he’d begun in 1973.

Bowen’s death on May 4 generated scores of headlines recalling the tax crisis in the 1970s that led to the relief for which he is fondly remembered. Property taxes had doubled in the previous decade so candidate Bowen made “visible, lasting and substantial” cuts his top campaign issue.

Legislation passed his first year in office froze property taxes and made it harder for local governments to raise levies. It doubled the sales tax from 2 to 4 percent to make up lost revenue. It permitted counties to impose local option income taxes as long as most of the money was used to cut property taxes further.

Even then, Bowen worried about the temporary nature of the measures. By the time he left office in 1981 the legislature had carved out 18 exceptions to spending controls. “In my final address to the legislature, I warned that continuing this trend could lead to a property tax disaster,” he recalled in a 2008 letter to The Indianapolis Star. “My warning went unheeded.”

From 1973 to 1981, Indiana’s property tax collections fell by $1 billion. By 1993, they had returned to pre-Bowen levels sparking more taxpayer outrage. A court case declaring Indiana’s property assessment system unconstitutional created more problems in 2002, which led to more restructuring, and by the 2007 municipal elections, taxpayers were rabid over rising assessments and tax bills.

In 2008, Bowen emerged from retirement to speak in favor of Daniels’ reform plan, which, among other things, took school operating funds and welfare off the property tax and raised the sales tax to 7 percent to make up lost revenues. Bowen was in the gallery when Daniels outlined his plan to legislators in his State of the State address.

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The most significant step came in 2010 when voters passed an amendment to the Constitution capping property taxes at 1 percent of a homeowner’s assessed valuation, 2 percent for agricultural land and 3 percent for business. If government units want to raise money outside the cap, they must get voters’ permission.

Daniels was able to achieve something Bowen had not – handcuffs on local officials, who now must justify additional spending to taxpayers. Previous relief merely shifted the burden to other taxes or other taxpayers. This time budgets would have to be cut.

This doesn’t mean taxes won’t rise. Homeowners in some parts of the state saw May 2013 bills jump considerably, prompting questions about whether the cap has done what it intended. In Marion County, 70 percent faced higher bills due to lingering assessment issues and higher rates imposed by taxing units exempt from the cap. In most of the state, assessed value stayed the same or fell in 2012.

“There is no question that the combination of the caps, along with the major levy reductions paid for largely by sales tax increases, have given Indiana among the lowest, if not the lowest, property taxes in the country,” said Karl Berron, chief executive officer of the Indiana Association of Realtors.

Indiana’s system can still stand improvement, Berron said. The state does not sufficiently monitor assessment quality or equalize assessments when necessary. Work at the local level is hindered by archaic data systems and inadequate training. But problems are fewer and farther in between.

On the occasion of his passing, it’s worth remembering Gov. Bowen as the man who launched the modernization of the tax system. Indiana has just about reached his goal of “visible, lasting and substantial” property tax relief.